At today’s sitting of the Riigikogu, the matter of significant national importance “Tax system – How to go on?” initiated by the Estonian Centre Party Faction was deliberated.
In her report, Chairman of the Centre Party Faction Kersti Sarapuu noted that Estonia’s tax burden was one of the lowest in the European Union. In 2018, tax burden was 33 per cent in Estonia, while the European Union average was 40 per cent of GDP. In Latvia, Lithuania, Bulgaria and Romania, tax burden is lower than in Estonia. Sarapuu added that Estonia’s tax burden would remain at 33.2 per cent over the coming two years and would fall to 32.7 per cent by 2022.
In Sarapuu’s words, the second reading of the state budget for 2020 had showed that there were many sectors that needed additional funds. “Speaking of the opposition’s motions to amend, we would not be against their content if there were specific sources to cover them, but there are none, as matters stand today,” Sarapuu said.
“The state budget is nothing else than a budget of a family, and the people of Estonia are the family,” Sarapuu made a comparison. “And just like in every family budget, there are revenues and expenditure and a balance in the state budget. The equation is there, and if we want to have more services, we need to contribute more; there simply are no other options.”
Dmitri Jegorov, Deputy Secretary General for Tax and Customs Policy of the Ministry of Finance, spoke of the taxation of the digital economy. He described the international principles for the taxation of profits which he saw as problematic. “They originate from mid-19th-century Germany, and the official rules originate from a decision of the League of Nations at the beginning of the 20 century, but everybody understands that these basic criteria are of absolutely no importance to the digital economy. Physical borders and physical assets are not important when business is conducted on the Internet,” Jegorov said. “The problem is that, in all countries, companies who do not even exist in the countries under the taxation rules in place actively participate in the economies, and of course they never have to pay profit tax in such a case.”
As a proposed solution, Jegorov presented the European Commission’s plan to impose a 3-per-cent tax to be charged on the digital services turnover, consisting of three different objects of taxation on which the tax would be charged. Internet advertising, that is, provision of the advertising service over the Internet, is one of them. Bringing together buyers and sellers, or platform revenue from such activity, is another object of taxation. Jegorov mentioned Bolt, Uber and Amazon as examples. “That is, where there is a buyer, where there is a consumer of a service, and where there is a seller of goods or a provider of a service, and the platform makes revenue from bringing them together,” Jegorov explained. The sale of user data is the third object of taxation.
In the conclusion of his report, Jegorov drew attention to the fact that the labour market was changing, but active and passive revenues were differentiated upon taxation in a large part of Europe. Jegorov said that it might no longer be reasonable to make such distinctions between the forms of earning income, because in fact everybody would need pension and health insurance in the future. He proposed that everyone should have social insurance, and that we should all also pay for social insurance.
Jegorov noted that social tax only for working people would soon no longer be the optimal solution, and that countries should think of moving away from that. He also mentioned digital nomads who work on the Internet and who can choose the country to which they pay their taxes. Therefore it should be ensured that the Estonian social insurance system is attractive and that such people join the Estonian system.
In his speech, entrepreneur Indrek Neivelt pointed out that the Estonian tax system was stuck in the 1990s. In his words, the tax payment discipline and the tax collection capability had been different back then. “There was also no wealth to tax. Besides, as recently as 15 years ago or more than 15 years ago, capital was lacking – at the time when the corporate income tax exemption was introduced in Estonia,” Neivelt noted. He added: “The situation is totally different today. We have a well-functioning Tax Board that is doing a good job, we have a very good tax payment discipline, and there has been a surplus of capital in the world for some time now. At the same time, the concentration of wealth is also one of the largest world problems, not to speak of work relations that have changed and are changing.”
Neivelt drew attention to the fact that consumption taxes played a very large role in our tax system; however, if consumption no longer increased but began to decrease, the question would arise how we would cover our costs in society.
Neivelt said that the world had changed and it would keep changing faster and faster, and tax system also had to change. At the same time he noted that if taxes were to be changed, that had to be done little by little, not in big steps, because abrupt moves were too risky.
Neivelt proposed several ideas to change the situation. For example, he spoke of trans-European taxes, taxation of natural resources, VAT exemption for organic farming, taxation of assets, taxation of incomes and a ceiling for social tax.
Neivelt said that he supported progressive income tax. In his words, there is a much deeper philosophy behind it than it seems at first glance, and it clearly directs people’s behaviour. “First, many people who work overtime would be able to achieve a more balanced life and, second, it would be good if there was enough work for everyone. It is not good if some people work for 70-80 hours a week while others have no work at all,” Neivelt said. In his words, the highest level of income tax does not have to be 50 but for example 25-30 per cent.
At the same time, Neivelt thought that the corporate income tax system had to be reviewed. As to the taxation of harmful activities, he suggested that alcohol and tobacco excise duties should definitely be accrued in the budget of the Estonian Health Insurance Fund, and it would also be indispensable to tax products containing sugar.
“If we are not planning to increase the general tax burden, we can only redistribute it. The number of people who work and create value is not growing in Estonia. This means that we can shift the tax burden on various population groups,” Neivelt said in conclusion of his speech. “We should reduce the proportion of consumption taxes, and impose more taxes on harmful activities, assets and larger incomes. We should shift the tax burden more towards large companies, wealthy private persons and people who earn larger incomes.”
Representatives of factions took the floor during the debate on tax issues. Kai Rimmel spoke on behalf of the Estonian Conservative People’s Party Faction. Maris Lauri spoke on behalf of the Reform Party Faction and Andrei Korobeinik on behalf of the Estonian Centre Party Faction. Riina Sikkut presented the positions of the Social Democratic Party Faction, and Aivar Kokk presented the positions of the Faction Isamaa.
Jürgen Ligi (Reform Party), Aivar Sõerd (Reform Party), Marika Tuus-Laul (Centre Party), Erki Savisaar (Centre Party), Marko Šorin (Centre Party), Peeter Ernits (Estonian Conservative People’s Party) and Tarmo Tamm (Centre Party) also took the floor.
Video recordings of the sittings of the Riigikogu can be viewed at https://www.youtube.com/riigikogu
(Please note that the recording will be uploaded with a delay.)